Bernard Hickey: How Kiwis get rich

How do New Zealanders get richer? It seems an obvious question, but it's one we seem to be ignoring.

New Zealanders make a lot of wrong assumptions about wealth and income that we hope our leaders won't copy, but appear to be doing a lot of lately.

To cut to the chase on what most of us think and do about wealth: we get a regular high-paying job so we can save a deposit and then borrow heavily to buy a house to live in.

Then, if we're lucky (which has meant living in Auckland over the past five years), we can leverage those tax-free gains in our equity by buying rental properties and/or investing in a small business.

Once we have the five rentals, the bach, the business, the boat and the BMW, we can sit back and live rentier-style into a comfortable retirement. We can supplement a steady stream of rents and untaxed capital gains with a non-means-tested pension that rises with average wages, rather than the much more measly inflation rate.

Perfecto! That's what the majority of the population has come to believe we do to get wealthy in New Zealand.

Understandably, Joe and Josephine Public have followed their noses and watched what the politicians and grown-ups have done. They keep cutting interest rates and allowing tax-free capital gains, at the same time ignoring the advice of their Tax Working Group that a land tax would change some of these behaviours.

A quick perusal of the Parliamentary Register of Pecuniary interests shows most MPs own multiple houses, rental properties and baches. The most popular phrase in the document is "family trust", followed quickly by "rental property".

Yet everyone who has looked at wealth creation in any detail, including the Government's Productivity Commission and countless other experts, says the only sustainable path to increasing wealth is to increase the goods and services we produce every hour.

Continued below.

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This is productivity and is what eventually increases real wages and supports the prices of assets we own. That's why the Government keeps banging on through its Business Growth Agenda about growing businesses that invest in their people and technology to produce exports.

It's why the Productivity Commission has beavered away for the past five years investigating why our productivity performance has been so poor over the past 50 years and what could be done about it.

It's still early days, but the Government has yet to really drink the Productivity Commission's Kool Aid. A bunch of its recommendations around competition policy, social services, land use planning and international freight have yet to be adopted, or have been allowed to quietly wither on the policy-making vine.

This is all showing through in the statistics for GDP, wages and in the gap between New Zealand and the rest of the world. Last week Statistics New Zealand reported labour productivity grew 0.3 per cent in the year to March 2015, well below the already anaemic long-run average of 1.4 per cent from 1996-2015. For comparison, Australia's average over that period was 2.2 per cent.

Australia had a capital to labour ratio - which measures how much technology businesses use and train their staff to use - of 4 per cent over the period. New Zealand's was 1.7. This is why Australia's wages are 30 per cent higher than ours.

All this is showing through in our real income per capita, which fell 0.4 per cent in the 2015 year, despite a 2.5 per cent rise in total GDP for the year.

We added more people working longer hours and plenty of natural resources with a bit more capital, but didn't actually produce much more per person per hour worked.

Business investment fell 1.1 per cent in the December quarter and rose just 0.9 per cent from a year ago.

It's the same old story. New Zealand has avoided tough decisions on taxation, investment and competition and has bought growth by adding more resources - people, hours, land and water. We're not working much smarter or using technology to make us richer.

The economy is getting bigger, but productivity has stalled. That is not a recipe to make everyone richer in the long run.

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Bernard Hickey is the publisher of Hive News, a Wellington-based political and economic subscription news email service. He also writes for Interest.co.nz and appears regularly on Radio New Zealand, Radio Live, TVNZ and TV3. He has been a financial journalist for 25 years, having worked for Reuters, the Financial Times Group and Fairfax Media.